With the U.S. federal government entering another shutdown (temporary work stoppage) for the first time in seven years, tensions are rising in global financial markets. This shutdown is expected to go beyond a simple political clash and even affect the Federal Reserve's currency policy decisions going forward. It also appears likely to weigh on the Bank of Korea's rate decision scheduled after Chuseok.
According to foreign media reports on the 3rd, about 900,000 employees, roughly 40% of those affiliated with the U.S. federal government, are expected to be furloughed without pay due to the shutdown. Until a new budget takes effect, all discretionary functions of the government except essential operations will be halted, and essential personnel will continue working without pay.
◇ Employment and inflation indicators delayed in succession… U.S. growth rate likely to fall by 0.1 percentage point
The direct shock of the shutdown is expected to appear as disruptions in the release of major U.S. economic indicators. Including the September employment report that the Bureau of Labor Statistics (BLS) had scheduled for the 3rd, the releases of weekly initial jobless claims (the 2nd, 9th, and 16th), the trade balance (the 7th), the consumer price index (CPI, the 15th), retail sales (the 16th), and the producer price index (PPI, the 16th) are all highly likely to be delayed in succession.
The Fed can gauge labor market trends using private data and surveys from regional Feds, but the absence of official statistics increases uncertainty in policy decisions. Some in financial markets even note that the economy's compass has disappeared. Gennadiy Goldberg, chief strategist at TD Securities, warned in an interview with the Financial Times (FT), "Both the Fed and markets lose visibility," adding, "This shutdown could deliver a bigger shock than in the past."
In the short term, the shutdown also appears likely to affect the U.S. economic growth rate. According to the International Finance Center's report released on the 1st, "Impact and assessment of a U.S. federal government shutdown," if the shutdown lasts one week, the quarterly real gross domestic product (GDP) growth rate could fall by 0.1 to 0.2 percentage point (p). That is because delays in the government sector's expenditure on goods and services can hit aggregate demand.
Some also project that, as hundreds of thousands of civil servants are temporarily sidelined from work, the unemployment rate could rise from the current 4.3% to as high as 4.7%. In particular, with President Trump continuing to make threatening remarks that he could permanently fire some federal employees, there are also views that the situation could spread into structural instability rather than a mere "temporary blow."
◇ October FOMC likely to cut… Bank of Korea policy board on high alert
Market attention is focused on the Federal Reserve's October Federal Open Market Committee (FOMC). Amid signs of an economic slowdown that had already heightened expectations for a Fed rate cut, the shutdown has added concerns about a slowdown in employment and GDP and a gap in economic data, further increasing the likelihood of a cut.
According to an International Finance Center survey, nine out of 10 overseas investment banks (IB) expect the FOMC to lower rates by 0.25 percentage point in October. Participants in the federal funds rate (FF) futures market also see a 99.0% probability that the Fed will cut October rates to 3.75%–4.00%. That is 13.5 percentage points higher than a week earlier (85.5%).
The shutdown is also expected to affect the Bank of Korea's currency policy. As external uncertainty grows due to the shutdown, the Bank of Korea could be cautious about cutting rates. Moon Hong-cheol, a researcher at DB Financial Investment, said, "If the shutdown drags on, it could affect the U.S. economy, so we need to keep various possibilities open," adding, "If the shutdown becomes extremely prolonged and lasts more than a month, it will also affect the Bank of Korea's rate decision."
The increasingly severe overheating in real estate is also likely to lend support to holding rates steady. According to the Korea Real Estate Board (REB)'s release of the Weekly Apartment Price Trends on the 2nd, in the fifth week of September (as of the 29th), apartment sale prices in the Seoul metropolitan area rose 0.12% from the previous week. The pace of increase widened for the fourth straight week, growing from the previous week's 0.07%.
Kim Seong-su, a researcher at Hanwha Investment & Securities, said, "Given the recent rise in home prices in some areas such as Seoul, the Bank of Korea policy board is likely to focus on domestic financial stability issues, including real estate," adding, "For now, the odds favor a hold."